Economists Call for Clarity on Government Policy

A panel of economists Tuesday urged U.S. lawmakers to resolve outstanding uncertainty over tax and other policies to help the sluggish recovery, a difficult assignment for Congress as it heads into a contentious campaign season.

“Market participants are used to thinking that political gridlock is good, that it prevents politicians from interfering with the marketplace,” said Richard Berner, co-head of global economics and chief U.S. economist at Morgan Stanley during a hearing before the Senate Budget Committee.

But “gridlock today is more likely to be bad for markets” because the county’s long-term economic challenges demand politicians to act, he said.

In particular, the economists said that lawmakers need to formulate a plan for tackling ballooning federal budget deficits, including the looming impact of Medicare and Social Security. Without a clear plan, businesses and consumers will hold back on spending, fearing massive tax hikes, they said.
MIT economist Simon Johnson warned that it is “dangerous” to assume that the U.S. government will continue to enjoy cheap borrowing from foreign governments as it currently does, and that interest rates could increase soon as other countries’ economies improve.

U.S. policymakers need to undertake measures now that credibly reduce the budget deficit in 10 years and beyond, Johnson said. That can be accomplished through tax reform or overhauling Medicare, he said.

Until markets see a credible long-term budget plan, policymakers won’t have much room to undertake shorter-term stimulus to help the sluggish recovery, he said.

In contrast, Berner of Morgan Stanley urged lawmakers to take more aggressive steps to mitigate foreclosures, when asked if more stimulus is needed. Specifically, Berner advocated a proposal to enable borrowers to refinance mortgages guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.

Without more intervention, the housing market will continue its “slow motion” adjustment that will continue to inhibit economic growth and drag down consumer spending.

Berner also urged lawmakers to use money to create a job training corps that would not only support the unemployed but help workers avoid losing their skills, which economists say is at serious risk with long-term unemployment.

On the issue of tax reform, Sen. Bernie Sanders (I., Vt.) threw some cold water on the discussion. Equitable tax reform “ain’t going to happen,” he said, describing an army of lobbyists that would labor to recreate the types of loopholes and distortions that the economists said should be removed.

“That’s the real world,” Sanders said.

In general, the economists offered a less-than-stellar assessment of the U.S. economy’s performance, describing a slow recovery and lingering problems from the 2008 financial crisis. There seemed to be consensus that deflation was unlikely, but not impossible.

Economist Joel L. Naroff said he is “extremely concerned about growth over the next year,” concurring that the housing sector–among other problems–will continue to hamper growth.

Berner said a double-dip recession is unlikely, predicting “moderate but sustainable growth” of about 3% to 3.5% through 2011.